Saudi Arabia to tackle the public wage bill

Tackling in the Saudi Kingdom Wage bill

Posted by Serrai Invest Capital Ltd ( Media Team)

Recent changes to the terms and conditions of employment in Saudi Arabia’s civil service are expected to result in major budget savings; however, there are some concerns that the alterations could negatively affect the broader economy.

In 2015 the public sector wage bill totalled SR450bn ($120bn), or just under half of all government expenditure for the year; reducing this is a strategic priority as Saudi Arabia works to rein in its budgetary deficit.

To this end, in October a reform package came into force that included, among other measures, a freeze on salary increases for state employees, the cancellation of regular bonus payments and the suspension of most extra payments, such as overtime or hazardous work allowances.

Also included in the package of reforms was a 20% cut in the salaries of ministers, reductions to their allowances and a 15% decrease in expenses allowed for members of the Shura Council.

October also saw the Cabinet approve a measure to switch public servant payments from the Islamic Hijri calendar to the Georgian one. The shift will bring the salary schedule into sync with the state’s January-to-December fiscal calendar.

As a result of the change, public servants will lose 11 days worth of wages per annum, according to press reports. This represents a saving for the state on the salaries of its estimated 1.5m employees.

Under the NTP, salary and benefit outlays are projected to fall from 45% of budgetary allocations at present to 40% over a period of four years.

As well as targeting payroll and benefits expenditure, the NTP plans to cut the overall number of public servants and reduce the ratio of state employment by encouraging more people to take up jobs in the private sector.

“There are several other initiatives assigned by the NTP to the Ministry of Civil Service that will lead to workforce optimisation, such as encouraging early retirement, transitioning employees to the private sector and the Tadweer initiative. The latter will allow government organisations to fill vacant positions from other government entities and hence facilitate a better overall allocation,” Khaled Al Araj, the minister for civil service, told OBG earlier this year. “The introduction of the new performance management system will shift civil servants from being task-oriented employees to performance-oriented ones.”

Under the NTP, the government aims to facilitate the establishment of 450,000 new private sector jobs through to 2020.

Knock-on effect

The tightening of conditions for public servants is likely to have a knock-on effect for the rest of the economy, with the changes expected to curb retail spending, real estate investment and hospitality and entertainment outlays, as disposable incomes come under increased pressure.

Indeed, concerns over decreased earnings and rising costs look set to materialise over the last months of the year, despite some signs of increased economic activity, according to Khatija Haque, head of MENA research at banking group Emirates NBD.

“Recent announcements on spending cuts in the Kingdom are likely to weigh on household consumption and consumer confidence… as we head into the fourth quarter,” he told media.

The introduction of austerity measures has prompted the Saudi Arabian Monetary Agency (SAMA) to launch a study into how local banks can reschedule borrowers’ mortgage loans to help ease the burden on Saudis whose income has been trimmed.

SAMA has proposed that the terms of repayments for mortgages and other credit loans be eased, though the upper ceiling for repayments – 33.3% of total salary – may remain unchanged.

Although the Kingdom’s economy continued to expand in the first two quarters of 2016, the pace of growth is slowing, leading the IMF to predict GDP growth of 1.2% for the year, the lowest since 2009, as the effects of higher charges and more circumspect spending patterns are felt more strongly.